DEALBOOK; Ex-Regulators Find Home With a Powerful Firm

Published: April 10, 2013

Eugene A. Ludwig, is a former comptroller of the currency and a law school friend of Bill Clinton; the latest hire, Mary L. Schapiro, ran the Securities and Exchange Commission until late last year.">

The consulting firm is filled with so many former bureaucrats and political insiders that it has become known as Wall Street’s shadow regulator.

Nearly two-thirds of its roughly 170 senior executives worked at agencies that oversee the financial industry. The founder, Eugene A. Ludwig, is a former comptroller of the currency and a law school friend of Bill Clinton; the latest hire, Mary L. Schapiro, ran the Securities and Exchange Commission until late last year.

Building off those connections, the Promontory Financial Group has emerged as a major power broker in Washington, helping Wall Street navigate an onslaught of new rules and regulatory scrutiny. Promontory accompanied Morgan Stanley when the bank urged regulators to rethink limits on risky trading, records show. It also joined Bank of America, Citigroup and other big banks at the Treasury Department to discuss plans for dismantling failing financial firms.

But Promontory and other consultants are now facing scrutiny in Congress, amid growing unease over their influence and their close ties to federal authorities. The Senate Banking Committee is set to hold a hearing on Thursday to examine whether regulators inappropriately “outsource” oversight to consultants like Promontory, which are paid billions of dollars by the banks.

“This process raises troubling questions,” said Senator Sherrod Brown, the Ohio Democrat leading the Senate hearing. “By shining a light on these practices, I hope we can prevent this kind of fragmented and frustrating effort in the future.”

Promontory rejects the notion that it is beholden to Wall Street. The firm says that when it is hired by a bank, it reports to the board, not management.

“I consider my client to be the board members, who are keenly aware of their responsibilities and want an unvarnished and independent view,” said Peter Bass, a managing director at Promontory. Mr. Bass, once a State Department official, added that he was “in the business of telling inconvenient truths.”

Over the last decade, Promontory has secured lucrative deals to clean up bank misdeeds like foreclosure abuses and money laundering, according to public records and interviews with regulators and executives. The firm has also advised the government of the United States and those of far-flung locales like Cameroon and Iceland.

Behind the scenes, the firm acts as an advocate for banks, helping draft letters that challenge crucial rules and discussing reforms with regulators. While Promontory has not registered as a lobbyist since 2009, the firm’s executives have met with regulators at least 10 times in the last two years on thorny issues like the so-called Volcker Rule that curbs risky trading, according to an analysis of data from the Sunlight Foundation, a nonprofit organization that tracks government disclosures.

“Promontory does not seek to influence regulators and does not lobby,” the firm said. “This does not mean we never attend a government meeting with clients.”

Some lawmakers and housing advocates question the quality of the consultants’ work. Promontory, they note, was one of several firms that stumbled in the recent review of foreclosure abuses. In 2008, MF Global hired Promontory to improve its risk controls after a rogue trading blowup; three years later, the brokerage firm collapsed.

Banks are also privately raising concerns about Promontory and its steep fees, which can total as much as $1,500 an hour, according to people with knowledge of the matter. Bank executives, who were not authorized to speak publicly, said they sometimes hired Promontory to appease regulators, who think highly of the firm’s expertise.

Promontory defends its work, noting that it has helped turn around dozens of troubled banks. The firm, Mr. Bass said, continues to win new business, as part of “a flight to quality.” For example, the firm is working on Project New BAC, the broad cost-cutting effort under way at Bank of America.

“They have a lot of first-class people who know the problems facing the banking business, and who know the regulations extremely well,” said Robert G. Wilmers, the chief executive of M&T Bank.

Still, Promontory says there are limits to its authority. It cannot control whether banks disregard the firm’s advice and continue to run afoul of the law.

From the beginning, Mr. Ludwig cemented the firm’s ties to Washington and Wall Street.

Mr. Ludwig has occasionally invited Fed governors and other top officials to parties at this 13,000-square-foot Washington home, an $11.5 million estate replete with a tennis court and a modern art collection. Mr. Ludwig, a former executive at Bankers Trust, is also a regular at the Four Seasons restaurant in New York, where he is known by name and salad order.

Promontory said that Mr. Ludwig entertains regulators on occasion but that “there is no discussion of current matters.”